Sunday, May 17, 2009

BTO: Speakingout, fighting back

Business Times - 16 May 2009

Speakingout, fighting back

Ask Ron Sim of OSIM if he has any regrets acquiring Brookstone, and his reply is an unequivocal 'No'. The experience, he says, has yielded many valuable insights. By Wong Wei Kong


FIVE years is a long time in business. Even for a man used to hard knocks, the last few years have been rough. Things have not gone according to the script for Ron Sim. Back in 2004, when he was first interviewed in The Raffles Conversation, his home-grown brand OSIM with its signature massage chair was riding the crest of success. It was pushing into China, and planning to sweep into America and Europe. He was scooping up awards, including Businessman of the Year from The Business Times.


But it was against quite a different backdrop when Mr Sim spoke to BT again earlier this year. He remains as candid as ever, the old fire still burns within, but there is now a heavy dose of realism. And the watchwords have become consolidation and renewal, not rapid expansion.


Some of that, of course, has to do with the present financial and economic crisis in the world. A lot more, however, has to do with OSIM's bittersweet American adventure, an experience which, says Mr Sim, really opened his eyes.


OSIM had, in 2005, led a consortium that included a unit of Temasek Holdings to acquire Brookstone Inc in the US, borrowing $100 million to acquire for itself a 55 per cent stake. Despite the specialty retailer's propensity for making losses during the first three quarters of a year, OSIM was confident of turning the business around to whole-year profitability. Instead, OSIM's own profitability gyrated in tandem with Brookstone's quarterly volatility, with the cost of the acquisition weighing on the Singapore company's earnings and spoiling a once-proud profit track record. In the end, OSIM announced this year a $77.31 million write-off on its troubled investment in Brookstone.


But ask Mr Sim if he has any regrets acquiring Brookstone and it is still an unequivocal 'no'. And Brookstone is not the failure that many have made it out to be, he stresses.


'The key reason why we bought into Brookstone was very simple. I felt that there was no culture of massage in the USA. The penetration rate was very low. There was only upside, and Brookstone was the perfect vehicle. Even today, if you ask me if there are any regrets, I would say no. We have actually done very well at Brookstone since our acquisition in 2005.


'If you look at the Ebidta (earnings before interest, depreciation, tax and amortisation), it was US$22 million then. In 2006, it was US$45 million. In 2007, it was US$55 million, so there was actually very good growth in the first two to three years of our acquisition. In fact, we were planning to list it in the second quarter of last year, but we held back because the capital markets were weak. Then in the second half of 2008, the markets crashed. It was just bad timing.'


And it wasn't as if Mr Sim had jumped in on an impulse. 'Prior to the acquisition, I took up an OSIM franchise programme on my own account to learn about the US market and to test the market. I had nine OSIM stores fully owned by me in California for seven years. I found out that it would take too long a process to build our own stores up. It was better to do a leveraged buyout.


'The negative side is that in every merger and acquisition (M&A) where you do a leveraged buyout, there will always be implications in the first few years because we borrowed money. We had a bond that we had to pay interest on, and shares which we had to pay interest on, and that interest impacted us, not on an annual basis, but on a quarterly basis, because Brookstone depends a lot on the last quarter for profits. We equity accounted for Brookstone, and as a result, our earnings for the first three quarters suffered.'


A right, prudent move


The decision to write off the investment in Brookstone, described by Mr Sim as a 'right prudent move', does not signal the end of OSIM's interest in the US. The non-cash write-off led OSIM to post a $99.44 million net loss for FY2008 but freed it of any future share of Brookstone's losses. While OSIM will retain its 55 per cent stake, it need not report future Brookstone losses because the investment was structured as a joint venture with Temasek Holdings and fund manager JW Childs, and OSIM does not have board control because all major decisions require unanimous board approval. There is also the possibility of a write-back, if conditions improve in the US.


'In fact, there is no downside after this, only upside. I think it is good for the company. We continue to own 55 per cent of Brookstone and we continue to believe in it. If they stay focused on the business and continue to be creative in the market and have strong management execution, they will survive,' Mr Sim says.


The results of the write-off are already beginning to show. OSIM returned to the black for the first quarter of FY2009, posting a $3.2 million net profit against a $13.2 million net loss for the same period a year ago - most of which had been Brookstone-related losses.


Despite the financial pain, the Brookstone experience has yielded many valuable insights for Mr Sim, who started out as a commissioned salesman after military service with nothing but just an 'O' level certificate and a big, bold dream. 'As the Chinese say, it is better to walk a thousand miles than to read a thousand books,' he recounts.


'These four years, going to the US almost every month, I've been absolutely enriched. In my personal capacity, as a CEO, as a financial investor - it has helped me to be a lot more rounded. I used to leave all financial matters to the CFO, but today, because of Brookstone, I force myself to understand every financial detail.


'Understanding the financial process in the US has been a wonderful process. They are so far ahead in terms of financial structures and the ability to use these structures. I've learned, too, not just financial structures but also the difference in culture in terms of managing and operating a business. In Asia, you can be very nice and harmonious, and it's seen as a strength. In the US, being too nice and too harmonious can be taken as a weakness. I think the US is a lot more competitive - there is a vast difference in culture.


'But while the Americans are very competitive people, they are not necessarily more effective and productive. In Asia, we may be less competitive but in my view, we are more efficient and productive. The level of hunger is also quite different in the US. It's a much more mature market, with higher salaries, more comforts and higher expectations. But willingness is low.'


Digestive period


In retrospect, would he have done the Brookstone acquisition any differently? 'Well, that could be possible. We could have done it in a different way with a better understanding of the market and the options available and the companies available and people available. It is possible we could have done it in a different way. We could have enhanced it, but it's also easy to say that in retrospect. I must stress that Brookstone is not a failure. In every M&A, there is always a digestive period.'


One thing that came as a big disappointment to him was that the financial community in Singapore did not try hard enough to understand the Brookstone acquisition.


'We have been doing very well since we listed the company in 2000. I would also say in the last 20 years of the company, except in the last two years, we've had 18 years of non-stop growth. Obviously when we made this acquisition, there would be a negative quarterly impact.

We were profitable in the last 12-13 quarters, without the Brookstone implications. Unfortunately, the market did not understand. Investors in the US would actually look at it and say, the performance has been great. But the market here did not understand well enough the implications.


'Many times, people don't look at the details, they just look at the headlines and they draw conclusions from that. I think I was certainly surprised by the (lack) of understanding within the business community, the financial community and the analyst community. Even when I did the write-off, some people in the business community were asking me, does it mean you don't own Brookstone anymore? I had to say, it's a paper write-off, it does not mean we don't own the company anymore. I wish the financial community and the analyst community would read into the details and try to understand.'


Not surprisingly, the Brookstone experience has hardened his opposition to mandatory quarterly reporting, which is required of all larger companies here.


'My views on quarterly reporting have grown even stronger. I think it is wrong to require quarterly reporting in a mandatory way. One has to understand that the US has a highly leveraged market with very active hedge funds and private equity investors. Leveraged buyouts have a lifespan of three to five years. So quarterly reporting is very important in the build-up to buying and selling companies. But this is not the market we're building in Singapore.


'Half-yearly reporting is enough, and if some companies want to report quarterly, let them by all means. But I would say it's not necessary, unless you're saying this is a leveraged buyout market you want here, and that you want to turn companies around every three to five years, and you need quarterly reporting to create a trend line.


'If not, quarterly reporting is short-termism and a waste of time. It is making CEOs even more myopic in their views and the way they run the business. I think we must avoid this. We must not have this trading mentality. If we create a trading mentality, companies will not grow, companies will not be built, and that's bad for us. The US is different. It is a far bigger economy and it has what it takes to absorb the impact, even when everyone is leveraged to the hilt.'


With the financial impact from Brookstone now addressed, Mr Sim is focusing on strengthening OSIM itself. 'When a company has been basically growing in the last 20 years, there will always come a a point of complacency, of fat and of taking it easy. My time at Brookstone has also taken away some of my bandwidth, but all that's part and parcel of any growing company.


'We want to further strengthen our structures and our systems. In fact, we are almost at the tail-end of our restructuring and you'll see going forward that there will be a lot of re-invention and renewal of the entire company. We continue to bring in a second level of talent, not just new people, but internal talent. Internal talent is very important because these are people with a lot of conviction in the company. I think it's very important for people to feel for the company.


Company culture


'There is a clear culture in OSIM that I have been spending time and effort in building. Maybe it has not cascaded down to every employee but in terms of clarity, it is very clear. It is about being open minded, being focused and forward looking. This is the culture we're cascading down to every level. Our people have gone back to the basics of ensuring efficiency per product, efficiency per staff and efficiency per shop. Our people are now a lot more focused on ensuring there is better cost control. We will come out of this recession a lot leaner and trimmer.'


And it is by no means the end of the growth path for OSIM, he says. 'One of the key messages I've put across to my staff is the simple one of making full use of the crisis. It's silly to think that this will be the end for business. The well-being sector is a big market in Asia, let alone in the US and Europe.


'We see that there is still a lot of growth potential that can be realised. Asia is still an emerging market and people are getting more affluent. Singapore, Hong Kong, Taiwan and Japan are more mature markets, but the rest of Asia still has a lot more room to grow,' he says. 'The American quest continues, the European quest continues, it's just that with the crisis, it is more prudent for us to focus on Asia right now, and which I see recovering the fastest.'


The company remains the acknowledged leader in branded healthy lifestyle products in Asia – which has led to 'copycat' issues in the past. It sells everything from massage chairs and air purifiers to health supplements and treadmills. OSIM currently operates a wide point-of-sales network with more than 1,100 outlets in more than 360 cities over 28 countries in Asia, Australia, Africa, the Middle East, UK and North America.


Mr Sim says he is in no hurry to hand over the reins of the company, where he is still the biggest shareholder. 'I've just turned 50, I'm still a young boy! I'm still very hungry, there is still a lot of fire in the belly, and I think there is still more upside and this company will continue to grow for the next 10 years.


'I'm not trying to say an owner CEO is better. It's difficult to say that. But there is a difference because the owner CEO will try to build a business over the longer term. If you have to hire a CEO, which will be necessary at some point, you want to be very mindful that things are done in a way that does not compromise the long-term objectives of the company.


'Obviously, I'm always mindful of succession planning. It's always in my mind and we're always on the lookout for both external and internal talent. What I believe is that the structures within the company must be well established, and vision must be clear.'


He harbours no plans to bring his own children - he has three, of which the oldest, a daughter, is studying in a London university - into the business. 'I frankly do not want to add more pressure on them. They have a different upbringing from me. People like us came from nothing. They are luckier. I would certainly be looking at corporatising the company. They can be shareholders. If they have the hunger and the guts, they can always try their hand in the company.'


For one who painstakingly built the business over the past 20 years, the fierce criticism he had to endure over the last few years - when things went sour at Brookstone - must surely have rankled. But the OSIM man is looking forward to having the last word. 'Success is the best revenge,' he says. And few would want to begrudge him that.



CEO, OSIM International


1980: Ron Sim starts his own company trading household goods. Goes out of business in the 1985 recession

1987: Breaks into the healthcare sector, starting a company which is renamed OSIM in 1994

2000: OSIM is listed on the Singapore Exchange

2003: OSIM acquires 29.9 per cent of Global Active for $9.568 million

2003: Wins Ernst & Young 'Entrepreneur of the Year' award

2004: Wins The Business Times' 'Businessman of the Year' award

2005: Leads a consortium to acquire Brookstone Inc in the US, with OSIM borrowing $100m to take a 55% stake

2006: Mr Sim is ranked No 15 on Forbes' list of the 40 richest Singaporeans, with an estimated net worth of $255m

2009: OSIM makes $77.31m write-off on its investment in Brookstone. Reports FY2008 net loss of $99.44m

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